Remittance

What is a 'Remittance'

A remittance is the funds an expatriate sends to his/her country of origin via wire, mail, or online transfer. These peer-to-peer transfers of funds across borders are economically significant for many of the countries that receive them.

BREAKING DOWN 'Remittance'

Remittances have played an increasingly large role in the economies of small and developing countries. Since the late 1990's, remittances have exceeded development aid, and in some cases make up a significant portion of a country's gross domestic product (GDP); for example, remittances from overseas workers back to Nepal amounted to 25% of the nation’s GDP in 2014.

Remittance payments also comprise a substantial amount of the flow of capital between countries. In 2014, $583 billion in USD was transferred between countries -- $436 billion of which was received by developing countries. The countries receiving the largest share of remittances are the BRIC nations China and India. Those countries received $69.97 and $59.49 billion dollars in 2013 by 2015 estimates. Other examples include Latin American and Caribbean countries receiving a total of $66.5 billion in remittances in 2007, more than foreign direct aid and development aid. (Three quarters of this came from migrant laborers inside the United States.) The Philippines has also historically received a significant amount of remittances, amounting to $21.3 billion in 2010. Remittances to many African countries have historically been more difficult to track. A paper from University of Iowa’s Center for International Finance and Development estimated $40 Billion USD was sent via 20 to 30 million African immigrant laborers annually.

Remittances are seen as an important part of disaster relief and often exceed official development assistance (ODA). Remittances are also seen as a method to get those living in less developed nations to open bank accounts. Some believe this, in turn, helps promote economic development. Some countries limit remittances to wire transfers to banks. Banks usually end up limiting the services they use to specific money transfer companies.

Transparency in Tracking Remittances

The actual methodology that countries use to record the amount of money people are receiving via remittances is rarely made public. While the majority of value transfers occur via web or wire transfers where they can be more easily accounted for, a fair amount of money is transferred in ways that are more opaque. This has raised concerns among financial intelligence units that remittances are one of the ways in which money can be laundered, or violent activities, like terrorism, sponsored.

Still, remittances play an important role in the growth of developing countries. In 2004, at the G8 Summit, member countries agreed to take on the problem of the relative high cost of moving funds across borders. In 2008, the World Bank established a database, where people could compare prices of different transfer services and ideally create more competition among the providers, bringing down the cost for consumers. In 2011 the Gates Foundation estimated that cutting transfer fees from 10% to 5% could ‘unlock’ up to $15 billion a year in poor and developing countries.

Up until the turn of this century, remittances were ignored by most economists in development economics. But, the remittance economy is growing and is fast becoming an important part of a country's ...